Amazon’s secret European weapon: Square footage

As if Amazon.com didn’t already have enough weapons in its arsenal to blow most other retailers away, here’s another: its European fulfillment operation.

In this age of lean and mean retailing, many other merchants look at the square footage of their distribution centers and immediately think: “Big overhead—how can I reduce this?” Amazon, no doubt, looks at how to control its warehouse and fulfillment center costs as much as anyone, but it also thinks of its distribution center as a true competitive advantage.

That’s a key differentiator and one Amazon, No. 1 in the Internet Retailer Top 500 Guide, is beginning to exploit, particularly in Europe. In a recent research brief, Goldman Sachs analyst James Mitchell notes that Amazon worldwide has amassed almost 16.5 million square feet of space in 39 distribution centers worldwide. About two-thirds of Amazon’s distribution centers are in the U.S., but it’s the 12 established or soon-to-be launched facilities in Europe that Amazon will use to secure a big competitive edge.

Amazon is already well represented across the European continent with two distribution centers in France, a pair in Germany and six in the United Kingdom. Two more—in southern France and in Doncaster, England—also either recently opened or are scheduled to before the end of the year, says Goldman Sachs. With more fulfillment space, Amazon will be able to capitalize on a business model that produces results: locate distribution centers and its supply chain near the major metropolitan areas and offer European shoppers plenty of nearly free or free shipping.

Fulfillment and order processing can be expensive—Amazon spent $582 million on fulfillment in the second quarter ended June 30, up from $409 million in Q2 2009. So far in 2010, fulfillment costs have increased year over year to $1.2 billion from $831 million. But with more fulfillment space under lease, Amazon now has the ability to expand free or reduced rate shipping to more European countries and dramatically boost its sales. Amazon doesn’t talk much about its international expansion plans and doesn’t give out sales projections for individual countries, says an Amazon spokeswoman.

But its distribution center expansion across Europe could deliver Amazon a big payday—and make it hard for other expansion-oriented online retailers in the U.S. to catch up. “Adding fulfillment capacity to provide free shipping in adjacent European countries such as the Netherlands or Italy could expand Amazon’s revenue opportunity by as much as 80%,” says Mitchell.

European e-commerce sales are projected to grow about 8% to an estimated $162.3 billion in 2010 from a projected $150.3 million in 2009, says research firm eMarketer Inc. With more warehousing space at its disposal and the ability to target major European population centers with lots of merchandise and plenty of inexpensive shipping, I expect Amazon will get its fair share of those sales.

Based on web site traffic measurements from comScore Inc., Amazon is already the top online retailing destination in the United Kingdom and Germany. I expect it will be the top destination in other European countries soon as well.

Thinking about expanding to the European Union? You may want to partner with Amazon—they may even give you a great rate on leasing space.